Many traders discount the detriment of negative emotions on their trading. They greatly overestimate their emotional intelligence and thus assume that they will be able to follow any trading system without negative intervention due to negative emotions.In fact, there are extremely successful market‐making operations set up simply to take advantage of people’s negative emotions.Almost any market maker will tell you that if you give any trader enough time, two catastrophic emotions will kick in and the statistics will catch up.
These two catastrophic emotions are fear and greed.It is very likely that if you’ve read at least one trading book in your life,you have heard about these two emotions. However, it is equally as likely that you are unaware of their practical relation to your trading. In order to have a true understanding of how these two emotions can negatively affect your trading, it is necessary to look into how each of them practically relates to your trading.Most traders find a reason to get in based on some kind of fundamental or technical analysis.
They typically put up more money than they should to enter the trade, as they are not familiar with proper risk management. They do not decide ahead of time how long they plan to stay in the trade. Because they don’t have a time limit on their trade, they typically are too greedy to realize a loss when they need to. To make things worse, when they do have a profit, they immediately start to fear losing it and end up getting out too early.
These are the two biggest problems with greed and fear. People stay in their losing trades for too long because they are too greedy to close out a trade for a loss. People also cut their losses short because they are too fearful to give up their profits. These two negative emotions pretty much control all of the actions of most traders.
If you think that you can control these two emotions, or if you think that you are not one of the traders who is controlled by these two emotions,think again. There is another mental process that is detrimental to the success of most trades, and that process is justification—making an emotional decision and then trying to rationalize and justify it after the fact.This is basically how the majority of traders function.
There is a lot of emotion tied to money. Therefore, most traders make decisions purely based on emotion. The issue is that they don’t realize this until it is too late. And the reason for that is justification. If they don’t want to get out of a trade, they will find 10 reasons to stay in. If they want to cut their losses short, they will find 10 reasons to get out of the trade prematurely. They will also usually find reasons to interfere with just about every trading system and break it due to their emotions.